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Your (consultant’s) old solution has become the new problem

Nice post which is in line with e.g. items written by Mike Mandel (whose articles are sometimes reviewed by business week readers as being more suitable for the “Workers Daily). Great to see how at least the author recognizes a changing context!

The idea of devising new rules for managers isn’t just a casual thought or theoretical exercise for me. It’s personal. That’s because I spent a quarter-century as a professor at the Harvard Business School, including 15 years teaching in the MBA program. I have come to believe that much of what my colleagues and I taught has caused real suffering, suppressed wealth creation, destabilized the world economy, and accelerated the demise of the 20th century capitalism in which the U.S. played the leading role.

We weren’t stupid and we weren’t evil. Nevertheless we managed to produce a generation of managers and business professionals that is deeply mistrusted and despised by a majority of people in our society and around the world. This is a terrible failure.

The Erosion of Trust
If you’ve read my columns, you know that I regard this loss of trust as a big deal. Trust toward business has reached new lows, with only 10% of Americans now saying they trust large corporations, according to the Apr. 8 edition of the Financial Trust Index. Some 77% of Americans say they refuse to buy products or services from a company they distrust, according to the 2009 Edelman Trust Barometer. But the sad truth is that even before the current economic crisis, people had lost faith in business. In 2007, only 16% of Americans were confident in business leadership—vs. 55% in the mid-1960s (Harris Poll No. 19, March 2007). Even more startling: In the mid-1950s, about 80% of U.S. adults said that Big Business was a good thing for the country and believed that business required little or no change (Roper, August 1954).

When I read such surveys, I hear a cri de coeur from everyone we failed: working moms, devoted dads, dual-career couples, factory workers, office employees, eager young adults, our parents and children, the educated and uneducated, the affluent and struggling. This failure has contributed to the decline of American business, to the point that companies have had a hard time creating enough wealth to sustain prosperity for an ever-wider circle of consumers and employees. Margins have shrunk steadily for 40 years; return on sales for the Fortune 500 has been declining since the early 1960s.

Many companies reacted to this decline by finding new ways to cut costs. The Harvard Business School, along with other business schools, taught them how: outsourcing, off-shoring, downsizing, reengineering, and finding new overseas markets for old products. Under the flag of “shareholder value,” (a concept honed by HBS faculty and glorified in many of our courses), firms also turned to “financialization,” another specialty of the curriculum. Since the 1980s, goods-producing firms have made more of their revenue and profits from finance than from selling their products.

Rules for a New Era
Historians observe that financialization is a typical indicator of economic decline. It moved the locus of control of the U.S. economy to Wall Street‘s increasingly abstract and risky financial instruments, accelerating the downward spiral with devastating results. While fixing Wall Street will help alleviate the current crisis, it’s not enough for a return to real prosperity and long-term growth. That will require a rebirth of business based on new rules for a new era.

The old rules that most B-schools have preached were invented a century ago for supplying mass consumers with affordable goods and services. They are poorly suited to the values of today’s new consumers, who want help to live their lives as they choose, with personal control, voice, and a practical sense of connection. Many smart people have spent decades trying—and failing—to adapt the old model to this new pattern of consumer demand.

As Harvard—along with many other business schools—now tries to understand what went wrong, it’s essential that everyone involved in business learns how to be the future. There are turning points in history when it’s time to salvage what is valuable from the old and put our energies into constructing a new model based on new rules.